Countercyclical Capital Buffer

In News

• The Reserve Bank of India said it has decided not to activate the countercyclical capital buffer at this point in time as it is not required.

About Countercyclical capital buffer

• Background: 
  • The RBI had proposed the CCCB for Indian banks in 2015 as part of its Basel-III requirements; it hasn’t actually required the CCCB to be maintained, keeping the ratio at zero percent ever since.
    • Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks.
  • This is based on the RBI’s review of the credit-GDP gap, the growth in GNPA, the industry outlook assessment index, interest coverage ratio and other indicators, as part of the first monetary policy of every financial year.
• Meaning:
  • Following Basel-III norms, central banks specify certain capital adequacy norms for banks in a country.
  • The CCCB is a part of such norms and is calculated as a fixed percentage of a bank’s risk-weighted loan book.
  • The CCCB is supposed to be in the form of equity capital, and if the minimum buffer requirements are breached, capital distribution constraints such as limits on dividends and share buybacks can be imposed on the bank.
• Significance:
  • Creating a buffer: It requires banks to build up a buffer of capital in good times, which may be used to maintain the flow of credit to the real sector in difficult times.
  • Restricting indiscriminate lending: It achieves the broader macro prudential goal of restricting the banking sector from indiscriminate lending in periods of excess credit growth that have often been associated with the building up of system-wide risk.

Source: FE